By Adam Halvorsen, head of business development UKat DMI
Ask a relatively tech-savvy colleague or friend what they know about blockchain, and the most likely reply will be, "Isn't that related to Bitcoin?" Blockchain is the underlying technology behind Bitcoin, and has been closely linked with the concept of cryptocurrency since its inception. But the potential for blockchain outside of that niche is becoming increasingly clear.
Blockchain has truly disruptive implications for the financial industry because it offers a decentralized ledger of all transactions, because it's tamper-proof, and because it's virtually instantaneous—all table stakes for processing any transaction in the financial services sector. In short, blockchain has many positive traits that could potentially help address one of the financial services' sector's biggest nightmares: legacy systems.
Streamlined wealth management
Big money means big problems: For high net worth individuals with different investment funds and a wide variety of financial services products in fragmented portfolios, large estates can become a morass of investments orphaned in different places. It's not uncommon for estates to have investment management problems.
Wealth management firms become the point of focus to organize prospectuses, investment performance history and current balance – bringing everything together for their client. Unfortunately, clients don't have easy visibility into their portfolios with a unified look and feel. With blockchain, all financial records, reports and files can be added to the transaction and become files that are private between the money manager and the estate.
This allows the estate and individuals to avoid fraud; all files become transaction records that live forever. It's a document management shift of great importance, both from the financial manager perspective and from the client perspective.
Anyone who has bought a house knows the hand-cramping reality of signing dozens of times on dozens of documents during a close. Inspections, appraisals, lawyers, title company records are all potential elements to a blockchain transaction. Within this blockchain 'smart contract', every step is a record that makes the chain more unique, for example, when the title company does paperwork, a block is added to the chain. When the inspector finishes his inspection, a block is added to the chain. When the lawyer reviews the documents, a block is added to the chain. And so on. Every addition makes the chain more valuable and the record or the transaction more valuable to both the lender, the insurance company, the title company and any party that has an interest in the transaction.
PwC estimates that blockchain could help the insurance industry save between $5 billion and $10 billion annually, thanks to potential improvements to placement, claims settlement, and compliance checks.
At its most basic, insurance is about swapping money for risk. It doesn't matter if the risk is a motorcycle or a rocket launch. Everything has risk, and everyone taking risks tries to hedge their bets.
Blockchain helps enormously in that regard, because the more insurers know about the history of something, the better business decision they can make in choosing to underwrite the risk and price the policy. For example, most things have a unique ID, such as a VIN number on a vehicle, a parcel number on a piece of real estate, a serial number on a consumer product or a meaningful ID on capital equipment. These ID's make everything an instrument in the blockchain and all can be appended to the respective policy to justify the risk rating and therefore price.
Given blockchain's ability to facilitate a more streamlined method of providing wealth management – as well as the potential implications in areas like mortgage banking and insurance – it's easy to begin to see how the technology may revolutionize the entire financial services sector. The possibilities created by such characteristics as unforgeable record creation alone have potentially massive and global implications in the critical area of identity data security – the Achilles' heel of digital and online banking, and a topic that's prominently on the minds of not only financial services professionals, but also consumers.
Blockchain clearly has the potential to overhaul existing business models in the financial services sector. But delivering on its promise is certain to prove no easy task, given the existing core beliefs and legacy systems that are embedded in the industry. Despite that, the question is not whether business models supported by blockchain technology will disrupt these organizations, but when. As organizations advance beyond seemingly endless debates about how to untangle complex, legacy infrastructure, perhaps they will finally have a secret weapon for defending their castles.